IMF Censure of Argentina Cements Investor Outcast Status

By Joshua Goodman and Ian Katz -
Feb 3, 2013

The International Monetary Fund’s
historic rebuke of Argentina is likely to cement its outcast
status among global investors while failing to persuade the
government to boost the credibility of its economic data.

Argentina on Feb. 1 became the first nation to be censured
by the IMF after the Washington-based lender said that President
Cristina Fernandez de Kirchner’s government isn’t addressing
concerns that it’s underreporting inflation, which analysts
forecast is more than double the 10.8 percent official rate.
While the move won’t have an immediate effect, it takes the
country a step closer to sanctions that include expulsion.

“This official action makes it quite apparent to those who
may want to invest in Argentina that there’s trouble,” said
Albert Fishlow, a former top U.S. diplomat to Latin America.

Still, Argentina’s feuding with foreign investors dates back
to its 2001 financial meltdown, which Fernandez blames on the
fund, and she is unlikely to change the course of policy that is
being shaped by other influences, such as the price of soybeans,
he said. Argentina is the world’s third-largest exporter of the
crop, which is the nation’s biggest source of hard currency.

“It’s a big drama and this isn’t the final act,” Fishlow
said in a phone interview from New York.

Argentina has been locked in a battle with the IMF and
investors since its 2001 default on $95 billion of debt. The
government hasn’t allowed the fund to review its finances, as
required of all members, since 2006, the same year it paid off
its entire debt with the IMF to end what Fernandez’s late
husband and predecessor, Nestor Kirchner, called the lender’s
“dictatorship.” Relations grew even more tense after Kirchner
replaced senior staff at the Indec statistics institute.

Disputed Data

The shakeup led to widespread questioning of Argentina’s
inflation and gross domestic product data. While economists
estimate that prices jumped 25.6 percent in 2012, Fernandez has
stood by Indec’s reporting.

Economy Minister Hernan Lorenzino called the IMF censure
baseless. In a statement, he accused the fund of exercising a
``double standard'' by trying to make an example of Argentina
while ignoring its own failure to detect data mistakes by rich
nations that contributed to the global financial crisis.

``Why haven’t we seen any IMF sanction against those who
enriched themselves while bankrupting the world?,'' Fernandez
wrote in a message posted on Twitter hours after the IMF’s
decision. ``Instead, the first measure it takes is against
Argentina.''

Worst Currency

Lorenzino said that Argentina will start using a new CPI
index by the fourth quarter of this year once a survey of
changing consumer trends is completed.

Between soaring prices and the region’s worst performing
currency in 2012, bond investors demand the highest return among
major emerging markets to own Argentine debt. The country’s
notes yield 1,058 basis points more than U.S. Treasuries,
according to JPMorgan Chase & Co.’s EMBIG index.

The gap between the official and private inflation rates
has enabled the country to save about $6.8 billion since 2007 on
debt payments, according to Buenos Aires-based research firm ACM
Consultores.

A drop off in growth and investment -- the economy expanded
an estimated 2.1 percent last year compared with an annual
average 6.5 percent since Fernandez took office in 2007 --
hasn’t moderated the government’s stance.

Capital Flight

Since being re-elected in October 2011, Fernandez has
tightened currency controls to stem capital flight that
intensified after she seized a majority stake in oil company
YPF SA (YPFD) last year from Spain’s Repsol SA. She’s also challenging
a U.S. court order to pay $1.3 billion to defaulted bondholders
who didn’t partake in restructurings in 2005 and 2010.

The government, in a filing Feb. 1 to the U.S. Court of
Appeals in New York, claimed the ruling illegally interferes
with its immunity as a sovereign nation and improperly exerts
authority over third parties including banks. The court will
hear arguments in the case on Feb. 27.

The IMF censure “is a non-event,” said Walter Molano, who
has been advising investors on Argentina since the 1990s and is
head of research for BCP Securities in Greenwich, Connecticut.

“With all the noise Argentina is going through now, with
this lawsuit, this is just background noise,” Molano said.

If anything, pressure by the IMF may help Fernandez “whip
up enthusiasm” for her policies, dovetailing with the
government’s narrative that foreign investors are trying to
“tarnish” the advances taking place in South America’s second-
biggest economy, said Fishlow.

Deadline

The IMF in its censure gave Argentina a Sept. 29 deadline
to take “remedial measures” to boost the accuracy of its data.
If it fails to do so, the fund can apply additional sanctions,
such as suspending its voting rights and barring the country
from taking loans. The final step is “compulsory withdrawal.”
The U.S. Treasury voiced support for the IMF censure.

“Clearly the IMF has altered its stance,” Lawrence
Goodman, president of the New York-based Center for Financial
Stability and a former global head of emerging market strategy
at Bank of America Corp., said in a phone interview. “But I’m
surprised that the can was kicked as far down the road as
September.”